Governments aim to keep surplus energy revenues from hands of vulgar public

The two most dangerous words in economics are “we need.” Taken together, they indicate the speaker has put aside the careful weighing of costs and benefits that is the ordinary stuff of economics, in favour of sweeping, absolutist prescriptions of what is self-evidently good for all: of what we need. They imply not only an impressive certainty about matters that are by their nature vastly uncertain, but an unexamined conviction that one’s own preferences — I might almost say tastes — in economic activity may be taken for everyone else’s.

Energy seems particularly prone to this sort of windy proclaiming: maybe there is a feeling that God-given resource endowments offer a suitably biblical setting for the issuing of commandments. Here is a typical passage from a recent essay in Policy Options: “We need to decide where resource development fits within the broader context of our national interests. We have national interests that need to be articulated both domestically and to international investors. To achieve the status of resource superpower we need to resolve the national debate on the virtues of resource extraction and accept our role in the world.” Quite what any of this means in concrete terms the reader is left to guess, but the hortatory power of those two words, we need, is undeniable.

Just now what everyone seems to agree we need are sovereign wealth funds, a place for governments, notably Alberta’s, to sequester surplus oil and gas revenues, safely out of the hands of the vulgar public. The Canadian International Council (“We need a Team Canada mindset… we need companies that are or can become global players… etc”), the Pembina Institute, the Canadian Centre for Policy Alternatives, even the Fraser Institute have all issued reports in recent months calling for the creation or expansion of such funds. Of course, in the interim the notion of “surplus” revenues has become something of an abstraction, but nonetheless the necessity of governments annexing a larger share of resource wealth and investing it on the public’s behalf is taken to be self-evident.

Related

Well, maybe not entirely self-evident. Sometimes the argument is that a portion of the oil output must effectively be quarantined lest it show up instead as export earnings, thus driving up the dollar and leading to the dreaded Dutch Disease. Sometimes the argument is that the revenues should be invested in ways designed to diversify the economy, allowing Canada to move up the value-added chain and escape from the resource extraction ghetto. More generally, the belief seems to be that, if far-seeing governments did not save and invest for the future, no one else would. As a press release from the Fraser Institute — yes, the Fraser Institute — explained: “Failure to save resource revenues in Heritage Fund leaves little for Alberta’s future generations.”

About the Dutch Disease argument perhaps little more needs to be said. The issue is not whether a high dollar is harmful to the manufacturing sector: it is why the interests of manufacturing should be presumed to take precedence over those of the resource sector, to the point that the latter should be subject to a special tax for the former’s alleged benefit. The same applies to the diversification argument. If there are higher economic returns to be had by switching from resource extraction to refining and other secondary industries, the people in those industries are surely at least as capable of seeing this as politicians, and of redeploying their capital accordingly. If there are not, it hardly makes sense for the government to take it and do it for them. (If the issue is diversifying out of fossil fuels, in particular, for planet-saving reasons, a carbon tax is the necessary and sufficient incentive.)

The third argument has rather more to it. It is true that non-renewable resources should be seen as an asset, as a stock of capital rather than merely a flow of funds. As such the present generation has a duty not to “eat the seedcorn,” but to preserve that capital to share with future generations. Rather than spend the proceeds on current consumption, then, the object should be to transform the capital in the ground into other forms of capital: assets yielding a stream of returns into the future.

All of that is true. What does not follow is that these assets must necessarily be held in state hands; that “investment” must automatically mean public investment. It is particularly fascinating to see people urging that funds be ploughed back into the Alberta Heritage Savings Trust Fund, given the quite astounding record of politicization and mismanagement of that honey pot. But it is hardly alone. Quebec Pension Plan, anyone?

I can think of at least three alternatives to the state-investment model that would meet the objective of capital transformation. One, the revenues could be used to pay down public debt — as any financial planner will tell you, one of the best investments you can make, the returns being the interest you no longer have to pay.

Two, rather than going into a centralized investment fund, they could be diverted into individual private plans, rather like RRSPs. They’d still be invested, but by millions of private investors, rather than a handful of public employees.

And three, they could be used as Alberta has used them: to keep personal and corporate income tax rates low. Everyone always swoons over Norway’s massive state investment fund, but the opportunity cost of that mountain of public investment has been punitively high tax rates on private investment. Alberta has chosen a different route, leaving greater room for private capital formation, not only in energy but across the economy. The resulting gains in productivity will pay dividends for generations to come.